Oil market volatility to stay
Amid signs of continuing volatility in the run-up to the crucial Opec plus meeting on December 6, oil prices recovered above $63 a barrel on Wednesday after tumbling more than 6 per cent on Tuesday in heavy trading volume.
Caught in a broader Wall Street selloff fed by mounting concerns about a slowdown in global economic growth, US crude plunged to its lowest level in more than a year on Tuesday as experts predicted that the current uncertainty would remain so for the foreseeable future.
Goldman Sachs said in a note on Wednesday that it expects oil markets to remain highly volatile in the coming weeks.
"It will take a fundamental catalyst for prices to stabilise and eventually trade higher," Goldman said in the note, adding that such a catalyst would include physical evidence that Opec production is "sequentially" declining and further proof of demand resilience.
The Opec is pushing allied producers including Russia to join in output cuts of one million to 1.4 million barrels per day.
Goldman said the renewed price collapse reflected "concerns over excess supply in 2019... (and) a broader cross-commodity and cross-asset sell-off as growth concerns continue to mount."
Mihir Kapadia, CEO and founder of Sun Global Investments, said both WTI and Brent crude have fallen seven per cent this week alone despite reports that both Opec and Russia are pondering supply cuts to restore some balance to the market.
"Investors continue to be concerned about the oil markets and are likely to remain so for the foreseeable future."
"The growing fears of a slowing global economy has continued to affect stock markets across the world; Asia particular, was badly affected. Australian, Japanese and Korean indices were lower but the Shanghai Index, which has fallen 20 per cent this year, rose. Europe, however has halted the declines and stabilised the market and most indices are trading higher. US futures are also in the green indicating a likely higher opening at US market open later today," said Kapadia.
Global stock markets have slumped in the past two months on worries about corporate earnings, rising borrowing costs, slowing global economic momentum and trade tensions.
In Europe, Germany's DAX index was up 0.9 per cent at 11,170 while the CAC 40 in France rose 0.6 per cent to 4,953. The FTSE 100 index of leading British shares was 1.1 percent higher at 7,021.
In Asia, Japan's benchmark Nikkei 225 dropped 0.4 per cent to 21,507.54. The Kospi in South Korea was down 0.3 per cent at 2,076.55. Hong Kong's Hang Seng index added 0.5 per cent to 25,971.47 and the Shanghai Composite edged 0.2 per cent higher to 2,651.51. Australia's S&P/ASX 200 lost 0.5 per cent to 5,642.80.
In the regional markets, DFM General Index and Saudi's Tasi Index rose 0.24 per cent and 0.13 per cent, respectively, while ADX General Index fell 0.4 per cent at the close on Wednesday.
The S&P 500 index on Tuesday hit a three-week low as weak results and forecasts from big retailers fanned worries about holiday season sales, while tech stocks slid further on concerns about iPhone sales.
Risk to oil prices
Goldman Sachs said a sharp collapse in demand or the absence of an Opec production cut would be the two main risk to a recovery in prices from current levels.
"While both are unlikely, we are more concerned about the latter, with such a shift leading to sustainably lower prices," Goldman said.
Wednesday's recovery to above $63 a barrel was spurred by a report of an unexpected decline in US crude inventories.
The American Petroleum Institute (API) said on Tuesday that US crude inventories last week fell by 1.5 million barrels, easing concerns for now that a supply glut is building up.
"The move yesterday was extremely sharp; after such moves you expect to have some rebound," said Olivier Jakob, analyst at Petromatrix. "The API reported a stock draw - it is not a big one but at least it's not a 10-million-barrel build."
Brent crude, the global benchmark, was up $1.00 to $63.53 per barrel at 1202GMT and traded as high as $63.77. US crude gained $1.01 to $54.44. However, Wednesday's bounce did little to reverse overall market weakness. Crude fell more than 6 per cent in the previous session and world equities tumbled as investors grew more worried about economic growth prospects.
Brent has fallen by more than 25 per cent since reaching a 4-year high of $86.74 on October 3, reflecting concern about forecasts of slowing demand in 2019 and record supply from Saudi Arabia, Russia and the US.
Traders see further downside risk to oil prices from growing US shale production and a deteriorating economic outlook.
Worried by the prospect of a new supply glut, the Opec is talking about a U-turn just months after increasing production.
Opec, plus Russia and other non-Opec producers, are considering a supply cut of between 1 million barrels per day (bpd) and 1.4 million bpd at a December 6 meeting, sources familiar with the issue have said.
Saudi Arabia may find taking action to support prices harder given the US pressure to keep them low and President Donald Trump standing by the Saudi crown prince in the wake of the murder of journalist Jamal Khashoggi.
Trump vowed on Tuesday to remain a "steadfast partner" of Saudi Arabia despite saying that Saudi Crown Prince Mohammed bin Salman may have known about a plan to murder Khashoggi.
"It is more difficult to expect a supply cut when you have the US president giving full support to Saudi Arabia and asking Saudi to maintain low prices," Jakob said.